KELLOGG COMPANY

With its ironic location, Battle Creek, Michigan-based Kellogg Company is in a constant battle for the #1 spot in the US cereal market with its main rival, General Mills. (General Mills' fiscal 2013 sales totaled about $17.8 billion, compared to Kellogg's $14.8 billion.) But Kellogg, founded in 1906, boasts many familiar brand names, including Kellogg's Corn Flakes, Frosted Flakes, Corn Pops, and Rice Krispies. While the company works to fill the world's cereal bowls, it supplements its bottom line with snacks and cookies (Keebler, Cheez-It, and Famous Amos), along with convenience foods such as Eggo waffles and Nutri-Grain and Bear Naked cereal bars. Its products are sold in more than 180 countries worldwide.

Operations

As part of its business, Kellogg operates through several segments based on product category and geographic location. They include US Morning Foods & Kashi (25% of sales), US Snacks (25% of sales), US Specialty, North American Other, Europe, Latin America, and Asia Pacific. Kellogg's international business focuses almost exclusively on cereal and wholesome snacks.

Geographic Reach

The food company, based in Battle Creek, Michigan, manufactures its products in 18 countries, marketing them in more than 180 countries. It generates 61% of its revenue from the US.

Sales and Marketing

Kellogg's largest customer is Wal-Mart, which has accounted for about 20% of its consolidated net sales since 2009. The company's top five customers, which includes Wal-Mart, generated some 32% of Kellogg's total sales. The company's dependence on just a few companies makes it vulnerable to the loss of or weakness at any one of these retailers. It's also vulnerable to competition from lower-priced private-label cereal brands, which consumers typically flock to during tough times.

The company markets its cereal products, in general, under the recognizable Kellogg's name. Products are sold to supermarkets through a direct sales force model for resale to consumers. Kellogg uses broker and distributor arrangements for certain products. These particular arrangements are leveraged to market its products in less-developed areas or in markets outside its focus.

In fiscal 2013 Kellogg has dog eared more money to spend on advertising. The company has had successes in recent years with improved sales following innovation launches supported by advertising.

Financial Performance

After posting sales declines between 2008 and 2010, Kellogg has logged positive sales growth during the years since.

The company posted sales of $14.8 billion for 2013, compared to $14.2 billion for 2012, which was mainly driven by a 13% increase in Europe revenue while U.S. Specialty and Latin America revenue each increased by about 7% due to strong results from new product launches, expanded points of distribution, and pricing.

Net income rose 88% to $1.8 billion, compared to $961 million, mainly due to higher revenue coupled with decreased R&D and interest expenses. Cash from operations increased $49 million to $1.8, compared to $1.7 billion, as net income rose and accounts payable fell.

Strategy

To boost capacity and profits, Kellogg is in the midst of a four-year global retooling of its manufacturing facilities, which involves the closing of an 89-year-old facility in Ontario, Canada, as well as the closing of an Australian snack factory, and the expansion of a plant in Thailand.

Kellogg anticipates that it will return to its ongoing operating model. In recent years it has invested in the business, adjusted its strategy to focus more on growth, and acquired Pringles. It expects to realize growth through increased investment in advertising and continued investment behind a strong lineup of innovation launches.

Kellogg is also looking for continued growth from its vegetarian business, particularly its Morningstar Farms and Worthington Foods brands of meat alternatives, as the veggie business has performed well as consumers look for healthier foods.

Mergers and Acquisitions

To further enhance its global snacks business, Kellogg acquired Procter & Gamble's Pringles canned chip business in 2012 for some $2.7 billion in cash. The deal propels Kellogg to the second-largest snack food company in the world, behind PepsiCo. Pringles boasts more than $1.5 billion in sales in 140 countries and manufacturing operations in Asia, Europe, and the US. It's a strategic fit, as the global snacks market is showing growth in both mature and developing regions.